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Diversification: Experts canvass appropriate taxation

How should Nigeria diversify its economy to save it from the effects of falling oil prices?

Appropriate taxation is the answer if the economy must be diversified. This is the view of experts and operators in real sector.

In separate interviews, some of them noted that states that find it difficult to pay salaries have poor Internally-Generated Revenue (IGR), in addition to the non-remittance of their monthly allocation from the Federation Account due to the fall in global oil prices. They argued that appropriate taxation is a viable way of diversifying the economy.

For instance, the former Minister of Industry and Deputy President, Lagos Chamber of Commerce and Industry (LCCI), Mrs Nike Akande, made a case for appropriate taxation, noting that in the face of dwindling revenue from the Federation Account and the failure of state governments to meet their obligations, there is the need to encourage individuals and corporate bodies to pay taxes.

“Without adequate taxation the government would not be able to provide key infrastructure. Everybody that is in a position to pay tax should do so without prompting, that is the only way government can work. The challenging economic environment provides opportunity for innovative policies that should encourage people to pay their taxes and for government to reward those who are faithful to their civic responsibility,” Chief Akande said.

Akande, who is also a tax ambassador for Lagos State, an award she got for her diligence in income tax payment, praised the state government for its innovative tax policies which resulted in exemplary governance and competitive infrastructure.

She, however, cautioned that multiple taxations is unhealthy for the manufacturing sector, calling for the harmonisation of taxes among the various levels of government to create an enabling environment for businesses to thrive.

She advised the government to support the ‘Buy Nigeria’ campaign, noting that it is the only way products can be more competitive and the local industries stimulated.

Her words: “A lot of people are buying locally-made and designed fabrics now. If our local designers become more creative, more people will patronise them. When l was a minister, l made sure that l wore locally made fabrics in all my official engagements. l would wish that the government continues to promote the use of local fabrics. If you tax manufacturers without encouraging them to grow with innovative policies and supportive infrastructure, you will kill the local industries.”

President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr Bassey Edem, also harped on the need to harmonise state and local government tax agencies that introduce spurious taxes inimical to the growth of businesses. He said though he supports taxation, multiple and spurious taxation are injurious to business.

He called for a stop to the exportation of raw materials. Rather, he said local industries should be encouraged to use available local materials, add value to them and provide finished products that can earn foreign exchange.

Edem further urged the government to invest in the energy sector by harnessing alternative sources of energy, such as wind, coal and solar, to improve electricity supply to support the manufacturing sector.

President, Nigeria Association of Technology Incubation Entrepreneurs (NATIE), Mr. Duro Kuteyi, said manufacturers were not unwilling to pay taxes, but would want to be taxed fairly.

Lauding the appointments at the Federal Inland Revenue Services (FIRS), he urged the government to look into the challenges facing Small and Medium Enterprises (SMEs) in terms of cost of infrastructure, multiple taxation and cost of funds.

“Manufacturers are expecting a reduction in tax rates. We are also looking at the FIRS to have a window for us to discuss and for them to understand how the economy has dealt with the SMEs before now. Smuggling is killing the efforts of SMEs, big multinationals producing raw materials are also killing the SMEs by taking up their product and producing them en-masse. They should not also compete with SMEs in producing the same products because we cannot compete with them on spread, distribution network and financing,” he said.

Kuteyi appealed to the government to address the challenge of power supply. According to him, fixed electricity charges on all sizes of SMEs are affecting operators severely. “They don’t want to listen. The government should really look at more protection for SMEs to thrive,” he added.

September 11, 2015
Diversification: Experts canvass appropriate taxation

How should Nigeria diversify its economy to save it from the effects of falling oil prices?

Appropriate taxation is the answer – if the economy must be diversified. This is the view of experts and operators in real sector.

In separate interviews, some of them noted that states that find it difficult to pay salaries are those with poor Internally-Generated Revenue (IGR), in addition to the non-remittance of their monthly allocation from the Federation Account due to the fall in global oil prices. They argued that appropriate taxation is a viable way of diversifying the economy.

For instance, the former Minister of Industry and Deputy President, Lagos Chamber of Commerce and Industry (LCCI), Mrs Nike Akande, canvassed the need for appropriate taxation, noting that in the face of dwindling revenue from the Federation Account and the failure of state governments to meet their obligations, there is the need to encourage individuals and corporate bodies to pay taxes.

“Without adequate taxation the government would not be able to provide key infrastructure. Everybody that is in a position to pay tax should do so without prompting, that is the only way government can work. The challenging economic environment provides opportunity for innovative policies that should encourage people to pay their taxes and for government to reward those who are faithful to their civic responsibility,” Chief Akande said.

Akande, who is also a tax ambassador for Lagos State, an award she got for her diligence in income tax payment, praised the state government for its innovative tax policies which resulted in exemplary governance and competitive infrastructure.

She, however, cautioned that multiple taxations is unhealthy for the manufacturing sector, calling for the harmonisation of taxes among the various levels of government to create an enabling environment for businesses to thrive.

She advised the government to support the ‘Buy Nigeria’ campaign, noting that it is the only way products can be more competitive and the local industries stimulated.

Her words: “A lot of people are buying locally-made and designed fabrics now. If our local designers become more creative, more people will patronise them. When l was minister, l made sure that l wore locally-made fabrics in all my official engagements. l would wish that the government continues to promote the use of local fabrics. If you tax manufacturers without encouraging them to grow with innovative policies and supportive infrastructure, you will kill the local industries.”

President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr Bassey Edem, also harped on the need to harmonise state and local government tax agencies that introduce spurious taxes inimical to the growth of businesses. He said though he supports taxation, multiple and spurious taxation are injurious to business.

He called for a stop to the exportation of raw materials. Rather, he said local industries should be encouraged use available local materials, add value to them and provide finished products that can earn foreign exchange.

Edem further urged the government to invest in the energy sector by harnessing alternative sources of energy, such as wind, coal and solar, to improve electricity supply to support the manufacturing sector.

President, Nigeria Association of Technology Incubation Entrepreneurs (NATIE), Mr. Duro Kuteyi, said manufacturers were not unwilling to pay taxes, but would want to be taxed fairly.

Lauding the appointments at the Federal Inland Revenue Services (FIRS), he urged the government to look into the challenges facing Small and Medium Enterprises (SMEs) in terms of cost of infrastructure, multiple taxation and cost of funds.

“Manufacturers are expecting a reduction in tax rates. We are also looking at the FIRS to have a window for us to discuss and for them to understand how the economy has dealt with the SMEs before now. Smuggling is killing the efforts of SMEs, big multinationals producing raw materials are also killing the SMEs by taking up their product and producing them en-mass. They should not also compete with SMEs in producing the same products because we cannot compete with them on spread, distribution network and financing,” he said.

Kuteyi appealed to the government to address the challenge of power supply. According to him, fixed electricity charges on all sizes of SMEs is affecting operators severely. “They don’t want to listen. The government should really look at more protection for SMEs to thrive,” he added.

September 4, 2015
Taxation: The Swivel of the economy (2)

The Nigerian Tax System

The Nigerian tax system has undergone significant changes in recent times. The tax laws are being reviewed with the aim of repealing obsolete provisions and simplifying the main ones. Taxation in Nigeria is within the administrative purview of the three tiers of government, i.e. federal, state, and local governments as stated in the constitution, with each having its tax space delineated by the Taxes and Levies (Approved List for Collection) Act.

In pursuing a vibrant tax fiscal policy, the Nigerian government has since 2002 embarked on series of tax reforms at the federal level. Beginning with the Federal Inland Revenue Service (FIRS) Establishment Act, 2007, the drive has been on institutional reforms and modernisation of the Nigerian tax system at the federal level. These reform efforts cut across tax policies, tax laws and tax administration.

Tax Policies

Tax policies are general statements of procedure, which guide the thinking and action of all concerned towards the realization of the stated tax objectives. The tax policies of Nigeria are to:

a)            pursue a low tax regime which aims at reducing individual tax burden and thereby encouraging savings and investments;

b)            move from the traditional coercive method of taxation to voluntary compliance;

c)            engage in taxpayer education through public enlightenment;

d)            deliberate movement of emphasis from income tax to consumption tax which is less prone to tax evasion;

e)            introduce self-assessment to encourage taxpayers participation in the tax assessment process which is more realistic in approach and democratic in nature; and

f)             reduce tax evasion and avoidance using the due process of law and the mechanism of an efficient tax administration.

In an effort to consolidate and achieve the objectives above, the Federal Inland Revenue Service collaborated with the Ministry of Finance and the Joint Tax Board to launch the National Tax Policy in 2012. The National Tax Policy is a document that will revolutionize the Nigerian tax system and place it at par with global practice. It is a big step in the modernization of the Nigerian tax system and provides a firm basis for tax legislation and improve the efficiency of tax administration by laying down guidelines and regulations. It also enhances the climate for doing business in the country.

Tax Laws

The various legal instruments put in place to ensure the realization of the tax policy objectives of the government have also been undergoing series of reviews and amendments. The notable ones are: PITA CAP P8 LFN 2004 (as Amended in 2011), Transfer Pricing Regulations, 2012, and currently, the redrafting of all tax laws in plain English which is on-going.

Tax Administration

There has been a repositioning of tax administration system ranging from tax campaigns, automation of processes, to entrenching a vibrant tax refund mechanism. The Integrated Tax Administration System, ITAS is the biggest of the repositioning efforts. It is a revolutionary tax administration system that will ease tax payment as well as administration.

ITAS is designed to increase revenue yield on a phenomenal scale. It is to be implemented with the Standard Integrated Government Tax Administration (SIGTAS) software solution- a solution designed to meet the needs of developing countries that wish to increase their control over state revenue. The specific objectives of ITAS is to make operations faster, increase voluntary compliance, increase revenue generated for national development and improve the efficiency and skills competence of employees in the FIRS.

Overall taxation as a concept should be viewed as a pivot, if not the pivot of economic development and the platform upon which fiscal policies are developed and implemented. In this regard, expenditure being the other plank of fiscal policy must always be tied to revenue and, given the general consensus that expenditure should as much as possible be based on available and sustainable resources, taxation provides the best option for achieving this harmony between revenue and expenditure especially in developing countries. In this way, taxation would play a key – if not the central role in sustaining fiscal policy in any economy.

It is therefore pertinent to look at the objectives of fiscal policy with a view to analyzing how taxation impacts these objectives and helps to attain them. By and large, fiscal policy in Nigeria is focused on addressing the major developmental challenges of providing revenue for sustainable expenditure and also ensuring that expenditure is productive i.e. channeled towards areas, which will in turn stimulate growth and development in the economy and provide additional avenues for raising revenue through taxation. Some of the ways in which taxation has impacted fiscal policy in Nigeria include:

Taxation of resource revenue to develop other sectors of the economy: Nigeria has a significant source of resource wealth, such as oil, gas and natural and solid minerals. Although resource wealth is usually easier to realize in the short term, it is generally not viewed as a sustainable source of revenue. It can however be used as a platform for developing other sustainable sources of revenue by utilizing revenue from such areas to stimulate growth and production in other areas of the economy, which are more stable and sustainable than resource wealth. Taxation in this regard, can be used to raise higher revenue from the identified sectors, which is then ploughed back into other areas through a conscious policy which government seeks to develop in the long and short term.

Use of tax revenue for sector focused development:This is closely related to the option above, but different in that, under this option, tax revenue from a particular source is utilized only in a particular area. This means for example that as fiscal policy, taxes from the oil and gas sector will only be utilized on capital or infrastructural expenditure, while taxes on personal income will be utilized only for recurrent expenditure. In this way, government is able to regulate its expenditure as it can only utilize what is available from the specified source for expenditure. A positive spin-off on this is that it would ultimately lead to improvement in each revenue source as government seeks increased revenue to fund the beneficiary sector.

Use of consumption/indirect taxes to raise revenue and to encourage or discourage consumption: Consumption and indirect taxes such as Value Added Tax (VAT) and other forms of sales tax are usually viewed as a more efficient means of taxation and also as more effective tools for regulating taxpayer behavior. Fiscal policy could therefore be focused on consumption taxes i.e VAT, which have a potentially wider tax base and could be more easily collected and accounted for. Other than raising revenue, consumption taxes could also be used to manage expenditure by government and taxpayers alike, by imposing higher or lower rates on specific items depending on the applicable policy to be implemented.

Use of tax incentives and special dispensations to attract and retain investments and stimulate growth in a particular sector– Over time, governments, especially in developing nations have had to grant tax incentives to investors in order to encourage such investors to make or retain investment in their economies. Incentives could be sector based or granted on individual basis, although it is preferable that incentives are always sector based and granted on some clearly defined basis rather than to individual companies or investors. Such incentives are effective tools for managing and sustaining fiscal policy, especially where the benefits are carefully monitored and measured to ensure there is an overall positive impact on the economy and on government fiscal policy.

Use of tax policy and legislation to shape fiscal policy: Tax policy and legislation being integral parts of taxation and indeed the major planks on which it rests are key tools, which can be utilized to develop and sustain fiscal policy. Tax policy provides the general framework and guidelines for the tax system, while legislation makes specific rules and regulations for implementation. A combination of the two will put in place a definite framework, which is backed by force of legislation and must be observed by Government. Examples of such policy and legislative directives could include periodic review of tax rates, tax incentives and provision of rules for regular review and amendments of tax laws amongst others.

From the foregoing, it becomes immediately clear that the role of taxation cannot be over-emphasized. Indeed without taxation, there cannot be a fiscal policy, seeing as it is the second of the two legs that constitute fiscal policy. One important thing to note is that, careful and diligent implementation of effective and proactive tax policy can have a measurably beneficial effect on the economy in particular and development in general.

April 13, 2015
Taxation: The Swivel of the economy (1)
In 1651, Thomas Hobbes during Britain’s Civil War, published a legal theory based on the ‘social contract’. According to him, prior the to social contract, man lived in a state of nature – man’s state of nature was one of a chaotic condition of constant fear and life in the state of nature was solitary, poor, nasty, brutish and short. To overcome these hardships, man entered into two agreements:
- Pactum unionis
- Pactum subjectionis
Under the pact of unionis, men sought protection of their lives and properties. This resulted in the formation of a society where people undertook to respect each other and live in peace and harmony. With the second pact of subjectionis, people united together and pledged to obey an authority and surrendered the whole or part of their freedom and rights to an authority in exchange for a guarantee of protection of life, property, social amenities and to a certain extent, liberty. Thus, the authority of the government or the sovereign or sate came into being. This authority also includes making policies, one of which is the fiscal policy.

Fiscal policy describes two actions by the government. The first is taxation- by levying taxes the government receives revenue from the populace. Taxation is a transfer of assets from the people to the government.The second action is government spending. This is in fulfilment of pactum subjectionis and may take the form of wages to government employees, social amenities, security, roads, free or discounted health care, education, transportation or electricity.When the government spends, it transfers assets from itself to the public. Since taxation and government spending represents reversed asset flows, it is nearly given that taxation is the swivel for a sustainable, efficient and effective economy.

History and Principles of Taxation in Nigeria

The history of taxation in Nigeria goes back to pre-colonial rule. There was a system of taxation in existence in the form of contribution of compulsory service, money, farm produce, goods and labour, which were essentially meant to support the various monarchies. Mainly, these taxes were levied in the form of ground rent, palm fruit tax, farm produce tax, cattle ownership tax, etc.

The modern tax system in Nigeria was first introduced in the year 1904 by Lord Lugard as community tax in the then Northern Nigeria. He later made changes, which resulted, to the Native Revenue Ordinance of 1917 in Northern Nigeria. The ordinance was extended to the eastern part of Nigeria in 1929. During colonial rule, taxes were imposed on individuals and corporate entities through a series of promulgations by the colonial power. In 1940, two major legislations were passed; these were the Direct Taxation Ordinance No. 4 of 1940 and the Income Tax Ordinance No. 3 of 1940. The Direct Taxation Ordinance of 1940 applied to all citizens except those in Lagos Township. The Income Tax Ordinance No. 3 of 1940 applied to expatriates and to Nigerians living in Lagos.

The Income Tax Ordinance was passed in 1943 repealing the 1940 Ordinance. The 1943 Ordinance together with the Direct Taxation (Amendment) Ordinance 1943 continued to apply until 1956. In 1956,the Eastern Region passed the Finance Law No. 1 of 1956. The basis of computation of tax provided in the Finance Law No. 1 of 1956 was basically the same as in the Ordinance of 1943. In 1956 tax allowances were provided for married taxpayers, and additional allowances for families with up to a maximum of three children. It also introduced the Pay-As-Your-Earn (PAYE) system of taxation. The Eastern Region Finance Law number 1 became operative in the region on April 1 1956, thus abrogatingthe application of Direct Taxation Ordinance in the Region. Another law was passed in 1962 repealing the 1956 Law. The Western Region departed from the Direct Taxation Ordinance by passing the Income Tax Law in 1957. The PAYE system was introduced in the region by the Income Tax (Amendment) Law 1961.

To ensure uniformity in both the application and incidence of taxation on individuals throughout Nigeria, the Income Tax Management Act (ITMA) was enacted in 1961, thus repealing all previous laws applicable to individuals, and making the main provisions applicable to all individuals throughout Nigeria. In the same vein, the Companies Income Tax Act (CITA) of 1961 was also promulgated. Subsequently, ITMA 1961 was repealed and replaced by Personal Income Tax Act (PITA) 1993, which came into being through Decree No. 104 of 1993, while the CITA of 1961 was repealed by the enactment of the CITA of 1979. The tax Acts which went through series of amendments, reassessments and reviews, are now included in the Laws of the Federation of Nigeria, 2004. Thus, codifying them as PITA CAP P8 LFN 2004 and CITA CAP C21 LFN 2004.

Principles of Taxation

These are the rules, qualities, conditions, standards or yardsticks by which the quality of a tax system is measured and by which a good tax policy can be formulated. Adams Smith was noted to have been the first person to mention the principles of taxation, which he called the canons of taxation in his book “The Wealth of Nations” in 1776. Although Adams Smith mentioned only four principles, scholars that came after him made some generally accepted additions. Some of these principles include the following:

Principle of Equity: This principle states that a good tax system should be as just as possible by ensuring that all persons who ought to pay the tax are covered by the tax and that each taxpayer pays exactly what is just and equitable considering his circumstance and ability. There are two types of equity i.e. vertical and horizontal equity. Vertical equity is the unequal treatment of taxable persons with varied taxable income. While horizontal equity is the equal treatment of taxpayers with the same taxable income.

Principle of Economy: This principle states that the cost of collecting tax should not be too high so as to outweigh the benefits derivable from the imposition of tax. For example if it costs a government N9 million to collect tax revenue of N10million, the tax system is said to lack economy.

Principle of Certainty: This principle states that the amount to collect as tax, the time of payment, the mode of payment and the place of payment must be made clear to the taxpayer, so that the taxpayer is not left at the whims and caprices of the tax authorities. In other words, the taxpayer should be fully informed about taxes to be able to arrive at a conclusion as to the amount of tax payable by him with reference to the provision of the tax law, as well as, to prevent him from being subjected to cheating by unscrupulous people and dishonest tax officials.

Principle of Convenience: This principle states that tax should be imposed at a time, in a manner and at a place that the taxpayer is in position to pay, so that collection of tax would be easy for the tax administrators. For example, a salary earner should be asked to pay tax when he receives his salary and not at the middle or the end of the month when the salary may have been exhausted. This is why PAYE is deducted at source, because it is more convenient than requiring the taxpayer to pay after collection of salary. A farmer should be asked to pay tax when he harvests his crops and not when he is doing the planting or clearing the farm.

Principle of Simplicity: This principle states that a good tax system and the tax law should be as simple as possible, both in interpretation and application. This requirement is particularly important in developing economies where the rate of illiteracy is high and where the culture of record keeping has not been imbibed by most small scale entrepreneurs.

Principle of Neutrality: This principle states that a good tax system should neither distort the consumption habits nor the production decisions of a taxpayer. In other words, a good tax system should not interfere with people’s willingness to work, produce, consume, save and invest.

Principle of Efficiency: This principle states that a good tax system should make it difficult for tax evasion (i.e. should make it difficult for non-payment of tax or illegal reduction of one’s tax liability).

Principle of Flexibility: This principle states that a good tax system and tax law should be such that it can be easily amended when the need arises, without unnecessary protocol.
April 6, 2015
ICAN, CITN sign MoU on taxation practice

The Institute of Chartered Accountant of Nigeria (ICAN) and the Chartered Institute of Taxation of Nigeria (CITN) have resolved the long-drawn rift between the two bodies over the practice and regulation of taxation in Nigeria.

In an arbitration mediated by the Association of Professional Bodies of Nigeria (APBN), ICAN and CITN last week signed Memorandum of Understanding (MoU) at an elaborate ceremony to end the professional crisis, which had lingered for more than a decade.

The highlights of the MoU and terms of settlement provide that chartered accountants will be able to engage in the practice of taxation without further examination from CITN. However, CITN will serve as the specialty regulator for the taxation practice in Nigeria. Members of ICAN are expected to undergo induction process for membership of CITN.

President, Chartered Institute of Taxation of Nigeria (CITN), Chief Mark Dike commended the efforts of all parties in resolving the dispute.

“ My joy knows no bounds that a preventable dispute that lingered on for several years and which defied several mediations is eventually being laid to rest today through the signing of both the Terms of Settlement, ToS and Memorandum of Understanding by ICAN and CITN. This feat was facilitated by the astute and painstaking mediation efforts of our umbrella body, APBN,” Dike said.

President, Institute of Chartered Accountant of Nigeria (ICAN), Mr. Chidi Ajeagbu also commended the APBN for wading into the issue which had gone through the Court of Appeal and Supreme Court.

He said ICAN would work together with CITN to improve the practice of taxation and membership of the specialized regulatory body.

President, Association of Professional Bodies of Nigeria (APBN), Mr. Foluso Fasoto noted that when in 2005 a dispute arose between ICAN and CITN; APBN had intervened, relying on section 4(4) of the APBN constitution.

According to him, in spite of the fact that the issue has become a subject of court action, APBN did not relent in its efforts of mediation between its two member bodies.

He said APBN believes that the court should not come to solve the problems between professional members.

“It is on record that the APBN, through its Mediation Committee has resolved similar issues in the past. To mention but a few: Tte Nigerian Institute of Architect, NIA and the Nigerian Institute of Town Planners, NITP; the Nigerian Society of Engineers , NSE and the Nigerian Institute of Estate Surveyors and Valuers (NIESV),” Fasoto said.

March 16, 2015
Government seeks way out of multiple taxation

The Federal Government, is contemplating a way out of multiple taxation.

In conjunction with Broadband Council (BC), it is promoting a ‘’smart state” initiative geared towards engaging governors and others at the federal and state levels to address the issue of multiple taxation. The government and BC believe that multiple taxation, is impeding the acceleration of the roll out of critical infrastructure across the country.

Executive Vice Chairman, Nigerian Communications Commission (NCC), Dr. Eugene Juwah, who spoke in Lagos, said the effort is aimed at creating the enabling environment for the deployment of communications infrastructure across the nation, adding that the initiative is already yielding result.

“The states considered for the smart state initiative by the Broadband Council are Bayelsa, Gombe, Katsina, Ondo, Anambra, Lagos. They are responding positively to be part of the league of states in this initiative. The initiative will lead to accelerated roll out of critical ICT infrastructure across the state necessary for development. “The initiative will also lead to a reduction in the cost of network deployment and an increase in the rollout of such networks to commercial centres, underserved and rural areas by communications operators.

“With this, an enabling environment will be created that will increase broadband penetration -both fixed and mobile and increase access to such services at affordable prices for customers, creating digitally enabled urban areas called ‘smart cities’.

“Those states that provide such an enabling environment, according to the ministry, will be labeled ‘Model States’ and afforded the utmost support in achieving these objectives. In exchange, participating states can expect to see growth in economic activity and productivity and subsequently the positive development of the state,” he said.

The initiative, according to Juwah, will cover areas such as standardised fees for site building and approvals within the state, reduction in fees and possibility of waiver for Right of Way (RoW) in deserving instances, implementation of a Dig-Once Policy, promotion of co-location between operators in the state and connectivity to state institutions within one kilometre of the given RoW.

The NCC, he said, has the responsibility of ensuring that there are guidelines and regulations governing all aspects of telecommunications service provision, including the installation of masts / towers and radio frequency exposure limits.

January 8, 2015
‘Multiple taxation hurting industrialists, businesses’

Industrialists are lamenting that the un-coordinated nature of Nigeria’s tax administration, which results to multiple taxation, is taking a toll on businesses and reducing the global competitiveness of the industrial sector. The industrialist, at a business luncheon organised by Manufacturers Association of Nigeria (MAN) for Chief Executive Officers/Managing Directors of member-companies, called for a more business-friendly tax regime, reports Assistant Editor Chikodi Okereocha.

It was a business luncheon organised by the Manufacturers Association of Nigeria (MAN) exclusively for chief executive officers/managing directors of its member-companies, but the razzmatazz and camaraderie barely covered the worries in the minds of the participants over the state of the industrial sector.

At the luncheon, which held last week at MAN Centre Complex, Ikeja, Lagos, the captains of industry could not hide their displeasure over what they described as Nigeria’s un-coordinated tax system, which, according to them, led leads to what is referred to as multiple taxation.

To the industrialists, multiple taxation, which is a direct result of the nation’s shoddy tax administration, now verges on overkill and is one of the greatest disincentives to business. Specifically, the industrialists consider the tax environment, particularly in Lagos State, as unfriendly and a major factor for the increasing cost of doing business in the country, which in turn reduces the industrial sector’s global competitiveness. For them therefore, the fear of multiple taxation is the beginning of wisdom. This was why the theme of the luncheon ‘Multiple Taxation: A Disincentive to Industrialists” was considered apt and timely.

Chairman, Ikeja branch of MAN, Prince Oba Okojie, set the ball rolling, lamenting that the incidence of multiple taxation and astronomical increase in taxes and levies has led to disruption of businesses in the state. He noted, for instance, that in addition to the taxes paid/payable to state government under Act CAP.T2 Laws of the Federation of Nigeria 2004, a total of 10 other taxes/levies are being collected by the Lagos State Government. Okojie listed some of the taxes that have been giving industrialists sleepless nights to include environmental development levy/charge, environment impact assessment levy/charge, and land use charge.

Others are Lagos State Environmental Protection Agency (LASEPA) levy (laboratory analysis), Ministry of Transport (MOT) road worthiness charge, LASEPA petroleum storage charge for tanks above 10,000 litres, solid waste charge, chemical storage permit, Lagos State Waste Management Authority (LAWMA) levy for waste disposal, and Lagos State fire service charge. Okojie said multiple taxation has added to the growing list of challenges facing industrialists such as insecurity, high lending and exchange rates, high handedness of some regulatory agencies, and multiple inspections/visitations from Ministries, Departments and Agencies (MDAs), amongst others.

The MAN Ikeja branch chairman pointed out that the application of multiple taxes/levies impact negatively on companies. Apart from restricting business expansion and reducing profit, he said the situation creates unemployment, retards economic development and growth, discourages both local and foreign investments, and breed corruption. Besides, multiple taxation, he said, does not allow local products to compete with imported ones. According to him, these factors are responsible for stunting the growth of the Nigerian economy.

He argued that in order to encourage investments within and outside the state,it must create new jobs and engender high economic growth; government must put in place an acceptable tax system, and outlaw the use of unorthodox means of collecting taxes and levies. Also, government, he insisted, must educate the public and facilitate compliance on the published list of approved or authorised taxes and levies in the state, local governments and its MDAs.

To the worries expressed by industrialists over multiple taxation, the Lagos State Government, through itsCommissioner for Economic Planning & Budget, Ben Akabueze,made a number of clarifications. Akabueze, who was guest speaker at the occasion,said because Nigeria is a federation made up of federal, state and local governments, each tier of government is saddled with the responsibility of providing certain services to the citizens and is also granted the funding source through the imposition and administration of assigned taxes and levies.

Akabueze however, said there is need to distinguish between taxes, levies, penalties and user charges. According to him, generally, a tax is a compulsory financial charge or levy imposed by governmental authority, and for which no direct benefit is derived by the taxpayer. On the other hand, payments required for services rendered by the government are basically user charges. “Strictly therefore, multiple taxation can only be said to exist where different tiers of governments are levying taxes on the same activity/income,” he clarified.

As the commissioner explained, modern governance is premised on a social contract that obligates the citizens to pay taxes to the government and in turn mandates government to provide certain goods and services for the well-being of the citizens. While noting that governance of Lagos State should not be on a different basis, he said MAN should assist in sensitising its members towards a tax compliance culture. He also said it is essential for MAN to censure and sanction members when they act in defiance of well established laws.

“Voluntary compliance with tax regulations is the way forward as it is a win-win situation for all parties concerned. To the government, it reduces cost of administration, increases tax revenue, and ensures good governance. On the part of the tax payer, it leads to certainty of tax obligation, prevents disruption of businesses with its attendant legal cost and bad publicity. It therefore, behoves members of MAN and other tax payers in general to ensure, among other things, that taxes deducted are remitted as and when due, and that necessary books of accounts and other documents/information are made available for inspection whenever the need arise,” he stated.

The commissioner added that taxpayers should refer grey areas to the tax authorities for clarification, and where they disagree they should utilise dispute resolution procedures available in the tax laws, as well as keep in focus that payment of tax is obligatory and not optional and that there are sanctions for non compliance with statutory provisions. He also harped on the need to maintain international best practice in tax compliance and build a reservoir of credibility.

Akabueze however, said the state government, on its part, will continue to operate a proactive, responsive, transparent, efficient and effective revenue service. “The Lagos State Government will continue to provide the enabling environment for economic growth and development by passing appropriate legislation, and implementation of citizen-focused policies and programmes,” he said.

While noting that the bulk of these projects/programmes are financed from Internally Generated Revenue (IGR), he promised that government will pursue further reforms of the tax administration system in the state with a view to further simplification of the assessment and payment process, transparency and elimination of power of discretion in the hand of revenue officers, harmonisation of taxes and levies collectible, reduction in the cost of compliance, voluntary compliance and increase in IGR.

The commissioner listed key aspects of the tax reforms in Lagos to include the Lagos revenue administration law, simplification of the tax assessment and payment procedure, tax education and enlightenment, expansion of the Lagos State Internal Revenue Service (LIRS), establishment of presence in all the major markets, and consultations with tax payer groups. Others are: enforcement of statutory provisions, harmonisation of local government levies and rate, consolidation of charges, and the setting up of revenue complaints unit.

President of MAN, Dr. Frank S.U Jacob, expressed confidence that the luncheon would further evolve additional road map germane to the effective implementation of the ongoing tax reform, strengthen the existing cordial public-private sector relationship, and further deepen government efforts geared towards transforming the manufacturing sector.

He said on its part, MAN under his leadership, has unfolded plans aimed at reducing the cost of manufacturing and improving the business environment for manufacturers in the country. “MAN will continue to work towards an environment that will enhance the sustenance of existing manufacturing outfits and attract new investments,” he promised.

The MAN President listed the new Council’s plan for the next four years to include greater interface with government at all levels to enhance MAN’s advocacy platform, creating a more robust data bank, strengthening the economics and research department, and improving the collaboration between MAN and research institutes and tertiary institutions, among others.

He said he has no doubt that the luncheon would promote a business friendly tax environment critical to the competitiveness of Made in Nigeria products and the continued survival of industrialists.

September 11, 2014
Taxation of contracts and direct labour procurement of MDAs (3)

Opadiran (1987) defined Direct Labour Procurement as a process by which a project is executed by the workers of an organisation instead of the project being contracted out. It can simply be described as a ‘do it yourself’ approach to project procurement.

Direct Labour could also be defined as a method of procurement whereby a client otherwise known as “the owner” uses his or her own in-house resources for the design and execution of a project. The in-house resources here will include both supervisory staff, skilled and unskilled labour force besides equipment. Worthy of note in this system is the elimination of the contractor, which makes the direct labour method distinct from other procurement methods.

According to Iyagba and Idoro (1995), Direct Labour method of procurement can take various forms among which are;

Fully in-house direct labour

Here the organisation has the human resources in place for all the phases of the project. The organisation pays the monthly wages or otherwise of the human resources.

Partially in-house direct labour

Here the design and production information could be prepared by practicing consultants, while construction is handled by permanent personnel.

Hire-labour direct labour

Here the project owners do hire oflabour, machinery, purchase material and coordinate the construction work, possibly engaging a qualified professional for the management of the construction process.

Self-help type of direct labour

Self-help construction where the inhabitants of a community are organised and mobilised with the direct labour establishments of a ministry.

Others are:

– The developer provides the necessary recources, buys the necessary materials, hires the men and the machinery required, and mobilises the resources on his own.

– Communal construction with the use of voluntary labour drawn from family members and friends.

– A self-help construction whereby the inhabitants of a community organise and mobilise themselves to execute a project.

These arrangements were seen to originally represent the true context of direct labour construction. Based on the definition, the following comments are made on the different forms of Direct Labour presented above:

Forms contract implication

Fully in-house direct labour. No contract Partially In-house Direct Labour Design and production of information by third parties are contracts.

Hire-Labour Direct Labour Hire of labour,machinery, qualified professionals and contract purchase of materials will not qualify as direct labour. Cash purchase of materials may qualify.

Self-help type of Direct Labour Direct Labour of the Direct Labour Establishment of the Ministry. Others may qualify as direct labour when executed through cash advance to a staff of the MDA within approval limit. They may not qualify when managed by a third party.

Contract can be inferred from the basis for payment by the project owner.

a. Cash advance to staff to be retired after the procurement: No contract

b. Payments for staff invoices: Contract (staff should not invoice his/her employer)

c. Payment to staff for third party invoices: Contract

d. Payment based on certificate of job completed: Contract

Any Direct Labour Procurement must possess these characteristics to qualify as non contract procurement.

a. Ownership of procurement facilities: The ministries, Department and agencies of government must use only the in-house resources for the design and execution of the project.

b. Absence of contractual relationship with both staff and non staff, in the procurement.

c. Payment should be through cash advance to staff. The cash advance must be retired at the end of the procurement and within approved limit.

Direct labour procurement and the nigerian tax laws

The schedule to the Companies Income Tax {Rate, etc of Tax deducted at source (Withholding Tax)} Regulations 1995 exempts those transactions which are, and indeed constitute “Outright sale or purchase of goods and property” and which take place “in the ordinary course of that particular kind of business”, from Tax deduction at source. Where a sale or purchase transaction becomes repetitive or habitual, it will not qualify for exemption. The sale of goods on a once-for – all basis will qualify for the exemption in so far as it meets the second condition. A sale takes place in the ordinary course of business when it takes place in the course of that particular business. Where, for instance, a trader sells goods directly to third parties, he will be seen as acting in the ordinary course of his business, that is, trading. However, where the trader enters into contract for the sale of the goods, he is no longer acting within his ordinary course of business, that is, trading, but has made an adventure into another business, that is, contracts. Further, a manufacturer who makes contractual sale or purchase is no longer acting within his ordinary course of business that is manufacturing, but has gone into another business, that is, contract. Although the manufacturer may use the items purchased or sold in his manufacturing business, the contractual arrangement for the sale or purchase will be subject to five per cent withholding tax.

Conclusion

It is the Public Procurement Bureau’s Policy that procuring entities outsource those services that are either not part of their core business activity or for which there is a fluctuation requirement in the terms of specialist skills or equipment , or where the open market provides a more efficient and commercial alternative. It is also its policy that services, materials and equipment shall be acquired by procuring entities at the most favourable terms compatible with the desired quality and delivery requirements, taking account of total life cycle costs and in a manner that safeguards and preserves the reputation of the procuring entity; and to support the development of an indigenous contractor base in Nigeria and particularly in the area in which the various procuring entities operate. Despite these comprehensive provisions in the Procurement Act and the Financial Regulations, many Government Agencies deliberately set aside contract award procedures in favour of direct labour procurement option.

The pertinent questions would be: why are the MDAs interested in direct labour procurement method? Could it be for better quality delivery, availability of more competent In-house staff, cost saving, non availability of competent contractors or Tax planning etc? Whatever the reasons, their actions should be guided by relevant Laws. They should be sure and ready to prove a case for direct labour in the Public Procurement Act, that they have ascertained:- that a schedule of rates, cost – plus or target contract would not be feasible, as quantities of work to be carried out cannot be defined in advance; that works are small and scattered or in remote locations with no local contractors and demobilization costs for outside contractors would be too high; that works must be carried out without disrupting existing operations; that the risk of unavailable work interruptions is better borne by procuring entity than by a contractor; that no contractor is interested in conducting the work at a reasonable price; that it has been demonstrated that Force Account (Direct Labour) is the only practical method for constructing and maintaining works under special circumstances; or that national security would be compromised if any method was used. Any tax planning that violates the provisions of the tax laws is illegal.

Some government accounting officers are quick to argue that the reason for Direct Labour Procurement option is the absence of budgetary provision for the payment of VAT which are invoiced to them by the contractors. It is advisable that Accounting Officers of Ministries, Departments and Agencies of Government should include the VAT payable in the budget estimate for approval instead of violating the provisions of the relevant laws. From the content of the Financial Regulations and the Accountant-General Circular of 2009, it is instructive to note that any payment for public procurement above N200,000 may not be accepted as a payment for Direct Labour, and could be deemed as Taxable Government Expenditure.

September 3, 2014
Taxation of contract and direct labour procurement of Ministries,Departments and Agencies (Mdas) of government in Nigeria. (1)

The Nigerian Tax Laws have provisions for the Taxation of contract Expenditure including those of Government, Ministry, Department and Agencies. The withholding tax (WHT) provision was introduced into the tax system in 1997 with limited coverage to rent, dividends and directors fees. Tax deduction at source has since been expanded to include:

– All aspects of building, construction and related services.

– All types of contract and agency arrangement, other than outright sale and purchase of goods and property in the ordinary course of business.

– Consultancy, technical and professional services.

– Management services.

– Commissions

– Interest and Royalty.

The introduction of WHT regime came about in order to address the problem of tax evasion although, there is the overriding objective of full disclosure, transparency, predictability and fairness.

Despite the huge Tax Revenue from award of contract and related source deductions, there is a growing interest in the usage of direct labour system in project procurement in Nigeria especially in the public sector. Direct Labour system is one of the several options of procurement used for project delivery process. This type of system is regarded as in-house because procuring entity, as different from contractor’s staff carry out the project delivery process and activities. One of the reasons for the preference for direct labour procurement is the Tax effect. Government Ministries, Department and Agency consume the services of contractors and hence are to be charged VAT by contractors who execute contract for them.

This paper is intended to highlight how Government Expenditures are taxed in Nigeria and the extent to which direct labour procurement can be a Tax evasion scheme. This paper will not in any way address Tax issues relating to Corporate and Individual Expenditures.

The Public Procurement Act 2007 And Award Of Contract

By the provisions of the Public Procurement Act 2007, the following should be noted about award of contract and Public Procurement:-

i. Procuring Entities should outsource those services that are either not part of their core business activity or for which there is a fluctuating requirement in terms of specialist skills or Equipment, or where the open market provides a more efficient and commercial alternative.

ii. The approval and maintenance of monetary and prior review thresholds is important for the faithful implementation of the PPA. The thresholds establish relevant approving authorities and methodologies. “Monetary Thresholds” is defined in the interpretative section of the Act to mean the value limit in Naira set by the Bureau outside of which an approving authority may not award a procurement contract.

iii. Procurement to be executed:-

a. by open competitive bidding, except as otherwise exempted;

b. In a manner which is transparent, timely, and equitable for ensuring accountability and conformity with the Public Procurement Act and regulations deriving therefrom;

c. With the aim of achieving value for money and fitness for purpose;

d. In a manner which promotes competition, economy and efficiency; and

e. In accordance with the laid down procedures and timelines.

iv. Where the Bureau has set prior review thresholds, no funds shall be disbursed from the Treasury/federation Account/ or any bank account of any procuring entity for any procurement falling above the set thresholds unless the cheque, warrant or other form of request for payment is accompanied by a “Certificate of ‘No Objection’ to Award of Contract” duly issued by the Bureau.

v. Subject to the monetary and prior review thresholds for procurements, the Parastatal Tenders’ Board of a government agency, Parastatal, or corporation or in the case of a ministry or extra-ministerial entity, the Ministerial Tenders’ Board shall be the Approving Authority for the conduct of public procurement.

vi. The following procedure shall be observed by ministries, extra ministerial offices, and other arms of government in implementing their procurement plans, viz;

a. Advertise and solicit for bids in accordance with guidelines prescribed by the Bureau from time to time;

b. Invite two (2) credible persons as observers in every procurement process, one from a private sector professional organization relevant to the procurement and the other from non-government organization working in transparency, accountability and/or anti-corruption areas;

c. Receive, evaluate and make a selection of the bids in accordance with prescribed guidelines;

d. Obtain the approval of the tenders board for the award of contract to successful bidder.

e. Obtain “certificate of ‘No objection’ to award contract” from the Bureau where contract is outside the threshold.

vii. All bidders in addition to requirements contained in any solicitation documents shall:

a. Possess the necessary:

– Professional and technical qualifications to carry out particular procurement

– Financial capability;

– Equipment and other relevant infrastructure;

– Shall have adequate personnel to perform the obligations of the procurement contracts.

b. Possess the legal capacity to enter into the procurement contract

c. Not be in receivership, the subject of any form of insolvency or bankruptcy proceedings or the subject of any form of winding up petition or proceedings

d. Must have fulfilled all its obligations to pay taxes, pensions and social security contributions.

viii. Procurement Approval Threshold (2012)

ix. Reduction or Contract splitting is an offence in the Public Procurement Act.
x. The Accounting Officer of every procuring entity shall be the person charged with the line supervision of the conduct of all procurement process; in the case of Ministries, the Permanent Secretary and in the case of Extra Ministerial Departments and Corporations, the Director General or Officer of Coordinate responsibility.
xi. Procurement by Accounting Officers must be on the

basis of approved quotation or Tender. Selection must be made from at least three quotations.

xii. Section 19 of the Public Procurement Act 2007 specifies conditions for “Force Account” i.e Direct Labour, which should be executed within three months, to include

– The procuring entity has ascertained that a schedule of rates, cost – plus or target contract would not be feasible, as quantities of work to be carried out cannot be defined in advance;

– Works are small and scattered or in remote locations with no local contractors and demobilization costs for outside contractors would be too high;

– Works must be carried out without disrupting existing operations;

– The risk of unavailable work interruptions is better borne by procuring entity than by a contractor;

– No contractor is interested in conducting the work at a reasonable price;

– It has been demonstrated that Force Account (Direct Labour) is the only practical method for constructing and maintaining works under special circumstances; or

– Where national security would be compromised if any other method was used.

BLIBLIOGRAGHY

1. Financial Regulations (Revised to January 2009); Federal Republic of Nigeria.

2. Public Procurement Act 2007: Federal Republic of Nigeria.

3. Companies Income Tax Act, Cap C. 21, LFN 2004

4. Value Added Tax Act, Cap V.1 LFN 2004.

5. Federal Inland Revenue Service Information circular No: 9801 (1998)

6. Federal Inland Revenue Service Information circular No: 9502 (1995)

7. Federal Inland Revenue Service Information circular No: 2006/02 (2006)

August 29, 2014
Tax audit and minimum tax computation

Taxation, worldwide, constitutes a major source of revenue to governments for funding their capital and recurrent expenditures. In recent times, there has been the urge for tax authorities in Nigeria to carry out spontaneous and sporadic tax audits and investigations on taxpayers, especially corporate bodies, suspected of tax evasion or tax delinquency. In doing so, the tax authorities, in discharge of their duties as contained in the enabling tax laws, adopt various methods in tackling taxpayers. The taxpayers, on the other hand, are quick to resist any additional tax burden that might drain their pockets. While tax authorities do have statutory powers to conduct tax audits and investigations on taxpayers to ensure that the revenues due to government are not lost by way of false returns, these powers are, however, not without legal limits.

Tax audits and investigations are very complex and tasking processes and as such, tax managers and their consultants must understand the ‘rules of the game’. On the other hand, according to the Federal Inland Revenue Service (FIRS), minimum tax is justifiable on the premise that every asset generates income. The minimum tax regulations are therefore anti-tax avoidance measures whether or not the affected company declares a profit, or the company was dormant during the relevant year of tax assessment.

Where a company is dormant, minimum tax is usually charged on the company’s net assets or on its share capital, whichever is the higher of the two.

Meaning of Audit

An audit is an examination usually by an independent person, on a set of the accounting books, records, documents, etc, from which a financial statement has been prepared and/or an examination and verification of a company’s financial and accounting records and supporting documents by an independent party after which an opinion is given on the state of affairs of such books and records.

Objectives of Statutory Audit

The primary objective of audit is to express an opinion on the financial statements of an enterprise as to whether:

i. Proper books have been kept,

ii. The financial statements are in agreement with the books,

iii. The requirements of the applicable legislations, for example, the Companies and Allied Matters Act (CAMA) 1990 (as amended) have been complied with,

iv. Applicable accounting standards (both local and international) have been complied with,

v. The financial statements give a true and fair view of the state of the financial affairs of the enterprise as at its balance sheet date,

vi. The financial statements give a true and fair view of the result of the operations of the enterprise for the period under consideration.

Tax Audit

This is an additional audit to the statutory audit and is carried out by tax officials from relevant authority. The approach and scope of work would be slightly different from that to be carried out for an audit under CAMA, 1990.

Objectives of Tax Audit

The objectives of tax audit are to enable the tax auditors determine whether or not:

i. Adequate accounting books and records exist for the purpose of determining the taxable profits or loss of the taxpayer and consequently the tax payable,

ii. The tax computations submitted to the authority by the taxpayer agree with the underlying records,

iii. All applicable tax legislation have been complied with,

iv. Provision of an avenue to educate taxpayers on various provisions of the tax laws,

v. Discourage tax evasion,

vi. Detect and correct accounting and/or arithmetic errors in tax returns,

vii. Provide feedback to the management on various provisions of the law and recommend possible changes,

viii.      Identify cases involving tax fraud and recommend them for investigation,

ix. Forestall a taxable person’s failure to render tax returns,

x. Forestall a taxable person rendering incomplete or inaccurate returns in support of the self-assessment scheme.

Powers of FIRS to Audit

Prior to the introduction of the self-assessment scheme, there was no specific provision in   Companies Income Tax Act (CITA) for tax audit. Subsection 4 of Section 43 was introduced to empower FIRS to carry out tax audit. The sub-section states: “Nothing in the foregoing provisions of this Section or in any other provisions of the Act shall be construed as precluding the Revenue Service from verifying by tax audit any matter relating to entries in any books, documents, accounts or returns as the Service may from time to time specify in any guideline.”

An integral part of the self-assessment scheme is the need to periodically verify the tax returns filed by taxpayers through tax audit procedures. The tax audit exercise essentially is meant to enable the revenue authority to further satisfy itself that audited financial statements and the related tax computations submitted by the taxpayer agree with the underlying records.

Types of Tax Audit

The scope and type of audit steps to be executed would depend on the type of audit to be performed, the underlying trigger and the objectives to be achieved. At present, FIRS is involved in the following types of audit:

1. Registration Audit – The purpose of this audit is to bring all relevant companies and individuals into the tax net. The audit involves obtaining information on businesses from the Corporate Affairs Commission (CAC), the Nigeria Customs Service, other third parties and routine visits to premises of suspected non-registered taxpayers in order to ensure that all companies and individuals who fall under FIRS’ tax jurisdiction are properly registered. In some cases, information in this regard can be obtained from other FIRS departments who may alert the Tax Audit Processes and Policies Department on the need to carry out registration checks regarding certain companies and individuals who are outside the FIRS tax net.

At the end of each registration audit, companies and individuals found to be outside tax net are usually registered and given Taxpayer’s Identification Number, and a Permanent Note Jacket file is opened

2. Advisory Audits – A visit to newly established businesses advising them of their obligations in terms of tax types, filing of declarations, payment of amounts due, records to be maintained and likelihood of audit if it is considered to be a risk and the sanctions that might apply for non-compliance. Obtaining information on newly registered companies from CAC and visiting their offices to advise them of their obligations under the law.

3. Record Keeping Audits – A check on enterprises that may have a reputation of not keeping adequate records. The visit would point out the obligations of the taxpayer as provided for in the CITA Section 63 regarding the keeping of records. Penalties are to be computed in line with CITA Section 92.

4. Desk Audits – Audits will generally require field visits. However, it may be possible to undertake some basic checks from the tax office. These can be conducted with regards to specific issues of a small enterprise when the auditor is confident that all necessary information can be ascertained by conducting the examination in the office. They can also be used as a preliminary examination of declarations/returns, analyzing ratios and cross-checking information to determine if an audit is warranted.

5. Single Issue Audits – These are quick response audits with a narrow focus. Their limited objectives focus on a single tax type or a single period concerning an individual taxpayer as opposed to the comprehensive audit. For instance, FIRS may only be examining whether the taxpayer has met their obligations in respect of employment – Pay-As-You-Earn, Withholding Tax (WHT), and Value Added Tax (VAT) or Company Income Tax (CIT).

6. Refund Audits – Verifying the taxpayer’s right to a refund prior to processing the refund in accordance with the provisions of Section 23 of the FIRS Establishment Act. Therefore, audits are usually undertaken for the first refund claim as well as where the refund claims varies significantly from established patterns and trends.

7. Audit Projects – Audit can be organized as a separate project for specific groups of taxpayers or tax types (e.g. VAT, WHT) on a regional or national scale. These projects may cover an industry (e.g. construction) or a line of business (e.g. retail) and/or certain items from the declaration or profit and loss account (e.g. capital allowance). They will consist of specific checks and are used to address a particular risk or to establish the degree of non-compliance in a particular sector.

8. Comprehensive (or full) Audits – All tax obligations over one or more tax periods are typically referred for extensive examination when discrepancies are uncovered during more routine single issue audits. As they are usually time consuming, comprehensive audits should only be applied to taxpayers when there is evidence of underreporting that will have an impact across taxes.

9. Mergers and Acquisition Audits – As part of mergers and acquisition strategies, it is usual for companies involved in the process to investigate their potential partners. Such investigations are undertaken by independent professional accountants and lawyers on behalf of the parties involved. A tax audit shortly after a merger or an acquisition has enormous potential for audit yields as the new entity’s financial statements would often materially differ from its previous components.

10. Public Offers Audit – Securities and Exchange Commission rules require companies involved in a public offer to disclose their financial history covering a period of at least five years to the investing public. Again, professional accountants, lawyers and other professionals usually carry out a number of investigations in order to provide for public disclosure the information required to be disclosed by the regulatory authorities. A tax audit shortly after a company has made a public offer has enormous potential for audit yields.

11. Post Pioneer Period Audits – During its pioneer status period, a company would not only operate without paying taxes but would also carry forward any losses sustained from the commencement of operations to the end of its pioneer status period. In this regard, tax audit would serve to revalidate the losses and capital allowances carried forward.

Minimum Tax Legislation

Section 32 (2) of the CIT Act (as amended) provides that where in a year of assessment, the ascertainable profits of a company, from all sources, results in a loss or where the company’s ascertainable profits results in no tax being liable for payment, or where the tax payable is less than the statutory minimum tax allowable, such a company shall be liable to be charged and to pay a statutory minimum tax, which amount will be dependent on whether the company has a annual turnover of less than N500,000, or more than N500,000.

A company with an annual turnover of N500,000 or less, that has been carrying on business for at least four years, is liable to charge to a minimum tax of any of the higher of the following sums:

(i)         0.5% of the company’s gross profit; or

(ii)        0.5% of the company’s net assets; or

(iii)      0.25% of the company’s paid up share capital; or

(iv)       0.25% of the turnover of the company for the relevant year of tax assessment.

Where, however, the turnover of the company is more than N500,000, the minimum tax payable shall be the higher of the above rates that is charged for companies with an annual turnover of N500,000 or less, plus 0.125% (or 50 per cent) on the excess of the turnover that is above N500,000 will be charged as minimum tax.

Exemption from Minimum Tax Regulations

Companies that are involved in agriculture, companies that have not carried on business during the first four years of their incorporation, or companies that have at least 25 imported equity capital fully paid for by a foreign company, are among the exempted corporations to whom the minimum tax provisions stated above do not apply.

Capital Allowances and Minimum Tax

For each year of tax assessment in which minimum tax is payable, the capital allowance for that year shall be computed together with any unabsorbed allowances brought forward from the previous years, and these shall be deducted as far as possible from the assessable profits for the relevant financial year, and or carried forward to the next financial year.

Dormant Companies and Minimum Tax

The general perception that dormant companies are not liable to pay any tax at all as they are not engaged in any trade or business is not correct. As a tax avoidance measure, minimum tax is charged on the higher amounts of such a dormant company’s gross profit, or on its net assets, or on its paid-up share capital, or on its turnover, at the rates stated above. The only exemptions to this rule are as also stated above.

To avoid penalties for non-compliance, owners of companies that are dormant for any reason, or are not making any profits, will do well to contact their tax advisers for compliance in order to avoid tax penalties that could finally liquidate such companies.

July 21, 2014